Big box tax battle

Township appealing lower valuation for Lowe’s store

April 20, 2013

MARQUETTE - In hopes of fending off potentially devastating continual losses in local property tax revenue, Marquette Township officials are contesting a recent state tax tribunal decision in the Michigan Court of Appeals.

The township's appeal involves how valuations of the true cash value of "big box" retail stores are determined and is expected to be decided later this year with far-reaching implications.

"This has to do with how things work in the entire state of Michigan, not just our little corner of it," Marquette Township Supervisor Dennis Liimatta said. "It all started as a very recent phenomena, it didn't used to be that way."

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LIIMATTA

Last year, Lowe's Home Improvement Warehouse in Marquette Township appealed its property tax assessments for 2010, 2011 and 2012 to the Michigan Tax Tribunal.

A hearing was held in November with tribunal Judge Victoria L. Enyart ruling in favor of Lowe's. The decision dropped the 2012 true cash value for the Lowe's store from $10.4 million to $3.5 million.

Enyart ordered Marquette Township to refund to Lowe's from schools, libraries and other local taxing units $138,409 in property tax revenue for 2010 and $146,832 for 2011 -in addition to $8,933 in interest- and taxes and interest totaling $152,902 for 2012.

Enyart's decision followed a September 2010 Oakland County case involving a Target store arguing a lower valuation versus the city of Novi, in the wake of the nation's severe recession striking southeast Michigan.

In ruling in favor of Target, Chief Tax Tribunal Judge Kimball R. Smith III said Michigan was particularly hard hit in the recession because of its dependence on the auto industry.

"As a result, vacancy rates increased, commercial rents declined and there was a substantial rise in foreclosures, both in the residential and commercial markets," Smith wrote. "All of these events had a significant effect in decreased demand for retail property similar to the subject (Target) and thus the true cash value of the subject property."

Attorney William Fahey - of the Fahey, Schultz, Burzych, Rhoades law firm in downstate Okemos - representing Marquette Township, said the tax tribunal has issued a number of subsequent opinions following the Target case precedent.

"Opinions and settlements have been entered that significantly reduced the values of a large number of stores across the state, including Meijer, Wal-Mart, Kohl's, Target, Lowe's, Home Depot and others," Fahey said.

In January, Marquette Township filed its case with the appellate court, which a month later agreed to consolidate that filing with a similar Breitung Township case against Home Depot. Fahey's firm is representing both townships.

Fahey said a so-called "dark stores" appraisal approach used by the tax tribunal in deciding these recent big box stores cases is "seriously deficient as a matter of law and settled appraisal principles."

"The tax tribunal is comparing operating big box stores to failed and vacant stores (dark stores) that went out of business and have been converted to some other use," Fahey said.

In the Marquette Township case, township attorneys argued the Lowe's should be valued considering existing use, present economic income and the land and structures at the time of tax assessment. In 2008, the 139,410 square foot Lowe's store was built off U.S. 41 on 14.75 acres in Marquette Township at a cost of $9.9 million.

Attorney Michael Shapiro, of the law firm of Honigman Miller Schwartz and Cohn of Detroit, argued the Lowe's had to be valued as if it were vacant and available for purchase.

That idea was based on examples provided at the hearing by appraiser Laurence Allen which indicated that when big box stores are sold they are converted to another use, demolished or investors will spend considerable money reconfiguring the space.

"Allen gave examples of several big box stores that were five years old that were purchased and razed for the new owner to construct a building that meets its specific business prototype," Enyart said in her ruling. "Allen was familiar with the sales of existing big box stores and was not aware of one that was not razed and substantially changed by the new owner to fit its own business model."

"This explained to the tribunal the decline in asking prices over a three-year period," Enyart said. "The substance was clear, in addition to Allen explain the market conditions; it was the documentation that gave Allen's report weight and credibility based on substance."

Enyart was harshly critical of appraiser Bruce Closser, who on Marquette Township's behalf argued the Upper Peninsula had a stronger economic linkage to Wisconsin than southeast Michigan. He gave housing prices as examples and said Wisconsin is closer for shopping. Closser said that after opening 25 stores in 2011, Lowe's announced 20 under-performing stores would be closed in 15 states.

"Lowe's did not close any stores during the recession or for the dates of value for the appeal," Enyart said.

Liimatta said the valuation arguments focus on what is the "highest and best use" of the property.

"Is the highest and best use of a brand new store that you just built to be a Lowe's a closed, dark store waiting to be turned into something else? That's B.S. That's nonsense," Liimatta said. "I'd say the highest and best use for a 2-year-old Lowe's is as a Lowe's. They're not going out of business. They're doing sales, the same thing with Home Depot in Breitung Township."

Enyart said Closser searched for sales of big box stores that retained the same use after their sale, but couldn't find any.

"There were too many issues with Closser's report to give it any weight or credibility," Enyart said.

The taxable value of the Lowe's store was dropped from $66.41 per square foot to $25 per square foot.

Marquette Township Manager Randy Girard said if all 11 of the township's big box retailers followed the Lowe's example and were valued at $25 per square foot, local taxing units would stand to lose a total of $641,580.

"The impact is huge," Liimatta said. "You look at the dollar amount to Marquette County from what happens just here in Marquette Township, extrapolate that out, it's devastating."

Liimatta said many small communities can't afford the legal cost to challenge the tribunal and have stipulated to the lower valuations. Liimatta said he was proud of the township board for deciding to draw a line in the sand and fight.

Marquette Township acting assessor Dulcee Storch said so far, there are tax tribunal appeals in process for Kohl's, Michael's and Pier One Imports for 2011 and Target, Menards and Applebee's for 2012. Storch said more are anticipated this summer after May board of review challenges are filed.

In addition to the $69,266 Marquette Township has spent in legal fees on the case, the money refunded to Lowe's is expected to affect budgets this fall.

"We're going to be hit here toward the end of 2013, we're trying to make it up in other areas, but that's what our 2013 budget was based on that revenue from Lowe's," Girard said. "We've just made commitments to build two buildings, based on the revenue stream we had that's now been reduced by that amount and if it's reduced by these other amounts, it's going to make it difficult for us to continue on the course that we're following in this community to make the improvements for residential growth, for growth at North Star Academy, for growth in the business community.

"We've put the infrastructure in place. We've built connecting roads. We're in the process of building some additional connecting roads. We've prepared areas by extending utilities. So all of that has occurred. That cost isn't going to go away and it was predicated upon projected revenues that are now being attacked by the tax tribunal."

Liimatta called the "dark stores" theory "ingenious" and doesn't blame attorneys representing the businesses for trying to exploit the concept. He said the township remains pro business development and pro big box store.

"It's not like we're anti-business or we're against the businesses, nothing could be further from the truth," Liimatta said. "But they've got to pay their fair share and this is just (seems like a) loophole to me that they found."